Executive Benefits Series — Part 4
One of the greatest strengths of an Executive Bonus Plan is that the employee owns the life insurance policy.
For many business owners, however, that raises an obvious question.
If the employee owns the policy, how do I protect my investment and encourage long-term retention?
A Restrictive Endorsement Agreement (REA) helps answer that question.
Rather than changing who owns the policy, an REA allows the employer and employee to agree that certain policy rights will remain restricted until specific conditions have been satisfied.
The employee owns the policy.
The agreement helps protect the employer’s investment.
Ownership and Control Are Not the Same
Business owners sometimes assume that if the employee owns the policy, the employer has given up every measure of control.
That’s not how an Executive Bonus Plan is typically designed.
The employee owns the policy from the beginning, while the employer and employee may enter into a separate Restrictive Endorsement Agreement that limits certain policy rights until agreed-upon conditions have been met.
This allows the employee to enjoy the benefits of ownership while supporting the employer’s long-term retention objectives.
A Business Tool, Not a Transfer of Ownership
A Restrictive Endorsement Agreement is not about taking ownership away from the employee.
Instead, it establishes the expectations both parties agree to before the employer begins making bonus payments.
Those expectations might include continued employment for a specified period or other mutually agreed-upon milestones.
When those conditions have been satisfied, the restrictions are generally removed according to the agreement.
The policy ownership never changes.
Encouraging Long-Term Retention
Executive Bonus Plans are designed to reward employees who contribute significantly to a company’s success.
A Restrictive Endorsement Agreement complements that objective by encouraging employees to remain with the business long enough to receive the full value of the benefit.
Rather than relying solely on salary increases or annual bonuses, the employer creates a long-term incentive that aligns the interests of both parties.
The employee receives a valuable benefit.
The employer gains an additional retention tool.
Every Agreement Is Different
There is no single Restrictive Endorsement Agreement that works for every business.
The appropriate provisions depend on the employer’s objectives, the employee’s role, the size of the bonus, and the overall retention strategy.
For that reason, Executive Bonus Plans should always be designed with qualified legal and tax professionals who can prepare the appropriate documentation for the employer’s specific circumstances.
Structure Follows Objectives
Like every part of an Executive Bonus Plan, a Restrictive Endorsement Agreement should support the employer’s objectives.
Some businesses may decide an REA is appropriate.
Others may determine a different approach better fits their goals.
The right answer depends on the business, the employee, and what the employer is trying to accomplish.
Next in the Executive Benefits Series
Turning Today’s Bonus Into Tomorrow’s Retirement Income
Retaining a key employee is only part of the story.
How can today’s Executive Bonus Plan continue creating value years after the bonuses have been paid?
In Turning Today’s Bonus Into Tomorrow’s Retirement Income, we explore how a properly designed policy may help support supplemental retirement income while continuing to provide life insurance protection, subject to policy performance and proper management.
Explore the Executive Benefits Series
- The Employee You Can’t Afford to Lose (Part 1)
- A Bonus That Builds an Asset (Part 2)
- How an Executive Bonus Plan Works (Part 3)
- How a Restrictive Endorsement Agreement Works (Part 4)
- Turning Today’s Bonus Into Tomorrow’s Retirement Income (Part 5)
- Is an Executive Bonus Plan Right for Your Business? (Part 6)
Let’s Talk
Wondering whether an Executive Bonus Plan fits your business? Let’s have a conversation about your objectives before discussing possible solutions.
Kurtz Lytle is the founder of IUL.Solutions, an independent insurance and retirement income practice based in Nashville, TN. All recommendations are made only after a full suitability review in accordance with each state’s insurance regulations. IUL.Solutions does not provide tax, legal, or investment advice. NPN #8993693.